Target is definitely not matching Wal-Mart on price, either. That would be tough to do given Wal-Mart's size, which allows it to drive down prices from suppliers. A recent comparison of prices by retail sector analysts at JPMorgan Chase showed that Wal-Mart prices for groceries and consumables were 7% lower than those at Target.

And Target won't be passing Wal-Mart overall anytime soon. Wal-Mart was the nation's biggest retailer at the start of this year, with $421.9 billion in annual global sales. Target placed third, with $65.8 billion in annual sales, according to the National Retail Federation.

Still, the logic is similar. Target wants to use groceries to lure shoppers in more often, assuming they'll wander into other areas of the store to buy stuff that sells with higher profit margins -- its cheap-chic merchandise.

The other change at Target that's making it more like Wal-Mart is a loyalty program called REDcard Rewards. This program offers a standing 5% discount on anything purchased with a Target credit card or debit card. As with groceries, the goal is to get shoppers in more often so they buy enough extra stuff to make the discounts pay off for Target.

And the winner is . . .

How's all this working out? Pretty well, but it's still a mixed picture.

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First, the good news. So far this year, Target has been beating up Wal-Mart in sales growth, points out Drew Weitz of Weitz Funds, which owns Target in its Weitz Partners III Opportunity fund (WPOPX), which outperforms peers over the long term and carries a five-star rating at Morningstar. The introduction of groceries and the 5% discount have a lot to do with this advantage.

Target posted 3.9% sales growth in the second quarter, following a 2% gain in the first quarter. In contrast, Wal-Mart sales contracted again in the second quarter, capping nine straight quarters of sales declines. More recently, Wal-Mart has finally been posting slight sales gains since July and was able to break the string of declines in this week's earnings report. But Target sales have been going up much more, at 5.3% in September and 3.3% in October.

Target believes PFresh is responsible for a percentage point of the year-over-year sales gains cited above. "In addition to telling us that they like their new store, guests show us by increasing their visits and spending in remodeled stores," CEO Gregg Steinhafel said in the company's second-quarter conference call.

The discount card is also helping. Converting customers to a REDcard typically increases store visits by 40% to 50%, says Target. And people who already had a Target card and activate the 5% discount increase visits by about 10%. By the end of the year, Target thinks the 5% discount will be boosting year-over-year sales by 2 percentage points.

A big problem, though, is that all of this is causing profit margins to slip, at least by one measure, as predicted by Morningstar's Keara. Gross margins, defined as sales minus the cost of goods, have been falling slightly. That's not a trend you want to see in retail. But it might not tell the whole story, for two reasons.

First, when you factor in fixed overhead, as well as the cost of the stuff that's sold, you can see the beginnings of a payoff in Target's strategy. Simply put, overall sales are growing faster than this broader measure of costs, says Weitz. So while Target is boosting sales by adding lower-margin goods and discounts, it's layering more sales on top -- a recipe for success, says Maile Clark, an analyst with MFS investment Management.

A nagging problem, though, is that customers stepping up their grocery shopping aren't wandering over into other parts of the store to buy clothing and household furnishings often enough. While the food business is growing by leaps and bounds -- sales are growing by around 15% annually -- Target is seeing only "a very slight increase" in the sales of other stuff as a result, says Steinhafel.